In Silicon Valley, venture capital responds to a generational change

Reid Hoffmanfounder of LinkedIn and longtime venture capitalist, is no longer the public face of venture capital firm Greylock. Michael Moritz, who has been with Sequoia Capital for 38 years, officially separated from the investment company last summer. And Jeff Jordan, one of Andreessen Horowitz's top investors for 12 years, left in May.

They are among the most recognizable of a generation of Silicon Valley investors who are exiting venture capital at the end of a lucrative 15-year period of growth for the industry.

Many others are leaving. Investors to World Tiger, Paradigm, Lightspeed Venture Partners, Emerging Capital And Spark Capital have all announced their intention to step back. Foundry Group, a venture capital firm in Boulder, Colorado, which has backed 200 companies since 2006, said in January that he would not raise any further funds.

Overall, the steady pace of departures has given the impression that venture capital – a $1.1 trillion The financial sector that invests in young private companies, sometimes giving rise to companies like Apple, Google and Amazon, is in a period of transition.

“We are at a tipping point,” said Alan Wink, managing director of capital markets at EisnerAmper, which provides advisory services to venture capital firms. Although there have been waves of retirements in the past, he said this one was more pronounced.

The turnover creates an opening for new investors to step up, potentially changing the identity of Silicon Valley's powerful players. It could also be a game changer for young companies when deciding where to seek money from.

Yet the latest generation of investors faces a landscape for investing in startups that has become more challenging. Few venture capital funds reap such huge profits – from going public or buying out start-ups – that can guarantee an investor's reputation. It's also making it harder for venture capital firms to raise money, with industry fundraising falling 61% last year and some large firms reducing their targets.

The latest generation of investors, including Mr. Moritz, 69; Mr. Hoffman, 56; John Doerr of Kleiner Perkins, 72; Jim Breyer of Accel, 62; and Benchmark's Bill Gurley, 57, made his name betting on consumer Internet start-ups like Google, Facebook, Uber and Airbnb, which became giants.

Today's emerging venture capitalists are waiting for their version of these winners. Some of the most valuable startups — like OpenAI, the $86 billion artificial intelligence company — are in no rush to go public or sell. And the frenzy around generative AI it could take years to translate into big victories.

“We're in this reset period, depending on where the technology is and where it's going,” said David York, an investor at Top Tier Capital, which invests in other venture capital firms. “These stars will emerge.”

Industry stalwarts like Vinod Khosla of Khosla Ventures, Marc Andreessen of Andreessen Horowitz, and Peter Thiel of Founders Fund continue to write checks and exert their influence. (All three companies supported OpenAI.)

But many others are stepping down amid a 15-year winning streak that has allowed the industry to reap billions in profits. curd in a slowdown. Venture capital firms typically invest in 10-year fund cycles, and some aren't keen to sign up for another decade.

“There is an element of a bull market,” said Mike Volpi, 57, an investor at Index Ventures, who recently announced he would withdraw from the firm's next fund. Mr Volpi's decision was reported earlier by the Newcomer newsletter.

EisnerAmper's Mr. Wink said that in some cases, investors backing venture capital funds are hungry for fresh blood. The message said: Get out on top.

“Don’t be like many professional athletes who sign their last contract and your performances on the field were far from those of your glory days,” he added.

For years, venture capital could only grow, propelled by low interest rates that encouraged investors around the world to take more risks. Cheap liquidity, along with the proliferation of smartphones and abundant cloud storage, has allowed many tech start-ups to thrive, producing exceptional returns for investors who have bet on these companies over the past 15 years .

Investment in U.S. startups grew eightfold to $344 billion between 2012 and 2022, according to PitchBook, which tracks startups. Venture capital firms have grown from tiny partnerships to huge asset managers.

The largest venture capital firms, including Sequoia Capital and Andreessen Horowitz, now manage tens of billions of dollars in investments. They have expanded into more specialized funds focused on assets such as cryptocurrencies, opened offices in Europe and Asia, and moved into new areas such as wealth management and public equities.

Andreessen Horowitz, Sequoia Capital, Bessemer Venture Partners, General Catalyst and others also became registered investment advisors, allowing them to invest in more than just private companies. Venture capital was briefly the flagship profession of young ambitious people in finance.

The expansions contributed to some investors' decisions to step back. Mr. Volpi, who joined Index Ventures in 2009 after 14 years at Cisco, said he got into venture capital as a change of pace from the corporate world. He has backed start-ups including business messaging company Slack and AI start-up Cohere.

But over the years, Index – and the entire venture capital industry – have become larger and more professionalized.

“Maybe it’s someone else’s job to fight this battle,” Mr. Volpi said.

Many venture capital funds have also become so large that owning a stake in a “unicorn,” or a startup valued at $1 billion or more, is no longer enough to reap the same profits as before.

“If you want to get three times your fund back, then a unicorn is not enough,” said Renata Quintini, an investor at Renegade Partners, a venture capital firm. “It takes a decacorn,” she added, referring to a start-up worth $10 billion or more.

The biggest companies have moved from the traditional definition of venture capital — very young, high-risk companies with outsized growth potential — to a more general idea of ​​“technology exposure,” Ms. Quintini said.

Manu Kumar, founder of venture capital firm K9 Ventures, has felt this shift. Since 2009, it has issued checks of $500,000 or less to invest in very young companies. Some of these investments, including Lyft and Twilio, have gone public, while others have been sold to larger tech companies like LinkedIn, Meta, Google and Twitter.

But starting last year, he said, venture capitalists who would have provided the next round of funding to the startups he backed began demanding more progress before investing. (Startups typically raise a series of increasingly larger rounds of funding until they go public or sell.) And potential buyers were laying off employees and cutting costs, instead of acquiring startups. -ups.

“Today, businesses have only one option,” Mr. Kumar said. “They need to build a real business.”

In October, Mr. Kumar told investors that the math in his investment strategy no longer worked and that he would not raise a new venture capital fund. He plans to monitor the market and revisit the option in a year.

“I want to have the conviction of what my strategy will be,” he said. “I don’t have that belief at the moment.”

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